Everyone has to start somewhere! In this article I’ll be answering the question: What should you invest in as a beginner? In short, your best place to start are low cost index fund ETFs that track the broader US stock market.
Let’s break this down in detail.
What Are Index Funds?
An index fund is simply a security, such as a mutual fund or exchange traded fund (ETF), that copy the investments of an index. Indexes are created by financial institutions and simply contain a list of stocks that they track. These indexes are primarily used for performance comparison for their own investments (i.e., am I beating the index?).
The most common indexes for stocks are the S&P 500 and the Dow Jones Industrial Average (DJIA). The S&P 500 simply consists of the top 500 US companies by market capitalization and are weighted by their relative size. The DJIA tracks 30 companies that are weighted based on their stock price.
Most investors tend to focus on the S&P 500 as covers the broader stock market. Therefore, an S&P 500 index fund is what I recommend for most novice investors to get started.
How Much Do S&P 500 Index Funds Earn?
The S&P 500 has been an incredible investment for the last 100 years. That’s right, 100 years of track record! Obviously past returns are not a guarantee of future performance. But the S&P 500 is close to the except to that rule.
So how much has it earned? Since 1924, the S&P 500 has earned 10.5% annually (with dividends reinvested). That means, if you invested $10 in 1924, it would be worth $216,884 in 2024! Crazy, right?
If you’d like to play around with the numbers, there is a great calculator here to try out different time periods.
Why Are Index Funds Great For Beginners?
Index funds are, by nature, very simple investments. By buying a fund that tracks an index like the S&P 500, you are buying a small piece of the top 500 companies in the US. Your investment is therefore very diversified while still giving you the benefit of owning stocks. How easy is that?!
Also, because these funds only need to track a simple index, the expenses for these funds are generally very low. Or sometimes, they are even zero!
I alluded to this briefly above, but I recommend an ETF for beginners. They are much more simple to purchase, provide better liquidity, and generally have lower expenses associated with the funds.
A quick side-note on expenses. These fund managers earn fees for administering these funds. This is generally through an “Expense Ratio” which is simply an annual expense as a percent of the asset value. So if you make a $1,000 investment and a fund has an expense ratio of 1.0%, you are paying the fund manager $10 per year.
Which S&P 500 Index Funds Are Best?
I cannot give a perfect recommendation on this one. But what I can do is give you my top two index funds that I recommend.
SPDR S&P 500 ETF TRUST – Ticker: SPY
SPY is the Cadillac of S&P 500 index funds. It is the most traded S&P 500 index fund on the market, but has a slightly elevated expense ratio at 0.09%. SPY is extremely popular and is heavily used by institutional and retail investors like yourself to gain exposure to US stocks.
VANGUARD 500 INDEX FUND – Ticker: VOO
VOO is identical to SPY in terms of its investments, but it boasts an even lower expense ratio of 0.03%! That means for every $1,000 you invest in VOO, you only pay the managers 30 cents! It doesn’t get much better than that! For this reason, VOO is generally by go-to pick for beginner investors.
The only downside to VOO is that it is slightly less liquid and therefore harder to trade options with. But as a beginner, you shouldn’t worry about that.
Where Can Beginners Invest?
Now you might be asking, where can I buy an index fund?! Luckily, in today’s day and age, investing has never been simpler. There are several trading apps such as Robinhood that offer an easy interface to purchase your first index fund. If you’d like a more complete experience, I highly recommend opening a brokerage account at Fidelity or Vanguard.
Simply search tickers I outlined above on your investing platform of choice and trade away!
Bottom Line
Hopefully we’ve now answered the question: What should you Invest in as a beginner? As a beginner, investing can be incredibly daunting. But it doesn’t have to be! As I’ve outlined above, index funds are extremely easy to invest in, have low expense ratios, and have a fantastic track record of returns. Best of luck with your new life as a shareholder and thank you for reading!
DISCLAIMER – THIS ARTICLE IS NOT FINANCIAL ADVICE. THIS ARTICLE DOES NOT CONSTITUTE A BUY, SELL, OR HOLD RECOMMENDATION ON ANY SECURITY MENTIONED HERE. THIS ARTICLE CONSTITUTES MY OPINION AND NOT A STATEMENT OF FACT. ALL INFORMATION REGARDING THE FINANCIAL SECURITIES MENTIONED IS ACCURATE AS OF JANUARY 18, 2024. DO YOUR OWN RESEARCH.